(Kitco News) – If the Federal Reserve moves to restart the rate-cutting cycle on Wednesday, the combination of a cheaper dollar, rising consumer inflation, and tariff-driven supply shortages could deliver a 1970s-style economy where not just gold but silver, platinum, and palladium make new highs by year-end, according to Daniel Pavilonis, senior commodities broker at RJO Futures.
In an interview with Kitco News on Friday ahead of this week’s Fed rate decision, Pavilonis said the central bank has little choice but to fulfill market expectations and deliver a cut.
“I think consumer confidence, Michigan consumer sentiment, and all of the economic data is telling a story where inflation is spotty,” he said. “And then the labor aspect to everything is showing that the labor market is just weakening. With the Fed’s dual mandate, they have to be supportive of the labor market.”
“The MO since Bernanke is basically to talk the market through what the expectations are,” Pavilonis said. “The Fed essentially is forced to cut rates. I don't think they can back away at this point. The revisions to the labor data have just been so bad.”
President Trump took to Truth Social on Monday to push for a big rate cut ahead of the September FOMC meeting. “‘Too Late’ MUST CUT INTEREST RATES, NOW, AND BIGGER THAN HE HAD IN MIND,” Trump wrote. “HOUSING WILL SOAR!!!”
But Pavilonis doesn’t expect the Fed to get ahead of the market on rates. “I don't think we're going to see a 50-basis-point cut or anything like that,” he said. “It's probably going to be consecutive cuts, three cuts into the end of the year.”
He said that gold prices are reflecting a broad consensus on where the economy is going – and that’s right back into inflation.
“I think the gold market looks at this as this still-sticky inflationary environment, where now we're cutting rates to support the labor market, which can have this bullwhip effect of flushing in new inflationary waves in the future,” he said. “I think that central banks, to just the guy on the street, are looking to buy gold as the ultimate hedge on inflation.”
The other side of the inflation equation, Pavilonis said, is the debt spiral.
“Historically, the only way for government to get out of this much debt is to inflate its way out of debt,” he said. “This is just the way things have worked economically for decades now. I think that's the other aspect of what's going on; Central banks realize that their holdings have to go up as a hedge, and the guy in the street is looking to hedge too. I think that's what we're seeing now.”
Pavilonis said that the current environment is reminiscent of the inflationary economy under the Nixon and Carter administrations, which is why he’s bullish commodities across the board.
“I think that this is a play out of the 1970s, and gold was one of the most valuable commodities, obviously for inflationary reasons, as a store of wealth,” he said. “But I think you're really going to see the other metals start to catch up now, too. Palladium seems like an excellent buy. Platinum's moving higher. Silver looks like it wants to break above $50.”
Pavilonis said that while the economy is weakening in certain sectors, the most successful tech companies are making massive investments not only in new data centers, but also chip manufacturing plants and other industrial-scale tech projects – and all of these will need a huge and steady supply of these metals.
“If you look at palladium, for instance, over 40% of it is produced in Russia,” he said. “Where in the U.S. are you going to get these metals? We've been outsourcing all this mining and everything else to other countries. And with tariffs, now we have to produce a lot of this stuff ourselves. I think that this incorporates into the bullwhip effect of needing the supply and not being able to produce these precious metals. I think that's going to be something that's ongoing.”
Another theme from the 1970s that Pavilonis believes could make a comeback is private investment in major government projects.
“One thing that happened in the 70s was that, for a lot of projects around the US and globally, interest rates were so high and governments were so indebted that they needed private investment through pension funds, 401Ks, and mutual funds,” he said. “That's how they would get the investment for infrastructure projects. I think that's something that we're probably going to see more of. If you look at a city like Chicago, you need new bridges, new roads, stuff that you need for the city, and the city itself is so indebted.”
Pavilonis said these various types of public-private partnerships could take different forms. “It's the municipal debt issuance, and private equity coming in and buying that stuff,” he said as an example. “I think that's how more and more of these projects [get done]. That's going to draw on demand. I would imagine infrastructure projects are going to be another draw on demand for a lot of these metals.”
And the push for these kinds of investments could come from the supply side as well, he said.
“Look at how much money is sitting in money market funds,” Pavilonis noted. “The money needs to go somewhere. It needs to get a yield, it needs to, to some extent, stay out of risk assets like the stock market. “The infrastructure projects, the bonds that are issued from that, are probably going to drive a lot of jobs and also a lot of renewal of infrastructure, which would draw demand from copper and [other industrial metals].”
“Ultimately, I think that's going to be a driving force going forward, especially if you get into a situation where the jobs market gets really soft and you need to get jobs going again,” Pavilonis said. “Infrastructure jobs can be there for that.”
All of this adds up to a perfect storm of strong support for the precious metals complex, and Pavilonis expects the price action to reflect this sooner rather than later.
“I think gold hits $4,000 by the end of the year, probably even higher than that,” he said. “I think silver hits $50. Platinum and palladium, palladium's a little bit further behind, but I think they're both trading around $1,800 by the end of the year.”
Spot gold shot up to a fresh all-time high of $3,703.24 per ounce shortly after 10 am Eastern, but prices pulled back thereafter to retest support near $3,680.
Spot gold last traded at $3,689.46 for a gain of 0.29% on the session.
